I want to take you through how we got from the financial system’s "systemic insolvency" to bailouts to record profits and bonuses again in the span of two years using the WikiLeaks cables as published in the Guardian today regarding a meeting with the US Ambassador to the United Kingdom and the Bank of England Governor Mervyn King on 17 Mar 2008.

Whether or not we are witnessing the end of the debate in Europe or simply another milestone on the way to The United States of Europe is a question for a dissertation, not a blog. In the meantime, these questions lead us to consider the current global monetary standing of “the member states whose currency is the dollar.” Below is the shrinking market share of the US Dollar as the world’s reserve currency since 1999…and the growth of the euro. And below is the United States’ shrinking market share of global GDP (in constant dollars) currency since 1969…and the growth of China and India.

Due to its size and importance, Germany has taken all of the criticism for enforcing a hard line on the austerity quid pro quo which allowed the euro zone bailouts to proceed. However, policy makers from a number of other countries share similar concerns about the negative political effects that bailouts for those perceived as fiscally profligacy will have. At varying times, we have heard this in Finland, Slovakia, and Austria to name a few countries within the euro zone. Politicians from Sweden and Latvia have also expressed reservations. In the Netherlands, it looks as if the government could receive a voter backlash for its support of the bailouts if things continue as they have.

The European financial crisis is of historic proportions and it remains unresolved as the year draws to a close. The resolution remains elusive, but there seems to be a finite number of ways that the situation will ultimately be resolved. Let’s consider them.

Here’s a run down of the recent woes in Vietnam. As you may recall, they are one of the few Asian emerging markets to be downgraded by the ratings agencies from Ba3 to B1 by Moody’s – both junk ratings. Most of the other ratings in emerging markets are going the other way. There is high inflation and a major accounting scandal sullying the waters. The Vietnamese Dong is depreciating as real interest rates remain too low. The Vietnamese government has refused help so far. So the question becomes: Is Vietnam in a downward spiral?

I have been on this story for sometime. My view is that, just as computers have become super cheap, phones will too. They are already headed in that direction. Soon, you will be able to get a smartphone with Internet, Bluetooth, 4G, Camera and all the bells and whistles for $0 with a 2-year contract. Phones are already headed in this direction but smartphones are only 19% of the market. So there is a lot of growth in the smartphone space to come. The operating system running most of these cheap smartphones will be Android, Google’s free and open-source OS.

A temporary payroll tax “holiday” would cut the tax by two percentage points (from the current 6.2% applied on employment income up to $106,800). The holiday is perhaps the most efficient means of providing a quick and effective stimulus, taking effect immediately, and raising weekly take-home pay for all workers. It will add about $112 billion in fiscal stimulus annually. And since the bottom 70% of Americans pay more in payroll taxes than in federal income taxes, it provides tax relief where it is most needed.

While the Moody’s downgrade of Ireland isn’t any surprise, coming on the heels of S&P’s move last week from A+ to BBB+, the sheer magnitude of five notches warrants a mention. We haven’t seen anything like this since the Asian crisis, when S&P took Korea down by four notches on December 22 1997 from BBB- to B+. To us, that crisis was when the credibility of the ratings agencies went out the window, as investors were simply astounded as to how far off the agencies had really been.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

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